Pricing dishes on your restaurant's menu is a critical aspect that can significantly impact the success and profitability of your business. Setting the right menu prices ensures that you cover your expenses while attracting customers.
One essential concept in determining proper menu prices is understanding your food cost percentage. This metric reveals the portion of your overall sales spent on ingredients and food supplies. By accurately calculating and managing your food costs, you can make informed pricing decisions and maximize your profits.
In this blog post, we will walk you through the process of calculating food costs and provide valuable insights on setting menu prices, monitoring sales, and reducing food costs effectively.
What is Restaurant Food Cost?
Food cost refers to the ratio between a restaurant's cost of ingredients (food inventory) and the revenue generated when those ingredients are sold as menu items. It is commonly expressed as a percentage, known as the food cost percentage. While some establishments prefer using the Cost of Goods Sold (COGS), which accounts for the total value of inventory used to create a dish, food cost focuses specifically on ingredient and recipe expenses.
Food Cost per Serving: Calculation and Formula
To determine the price of each menu item accurately, you need to know how much it costs your restaurant to make one serving. This calculation involves determining the cost of individual ingredients used in a dish.
Example: Let's say you own a sandwich shop and you want to determine the cost per serving of your signature item: an oven-roasted turkey sandwich. The ingredients for one serving include 8 ounces of turkey, 2 slices of focaccia, mayo, dijon mustard, mixed greens, tomato, and onion.
By calculating the individual costs of each ingredient, you can find the total cost per serving:
- Oven roasted turkey (8 ounces) = $1.90
- Focaccia bread (2 slices) = $0.85
- Mayo (1 tsp.) = $0.03
- Dijon Mustard (1 tsp.) = $0.03
- Mixed Greens (2 oz) = $0.90
- Tomatoes (2 slices) = $0.50
- White Onion (1oz) = $0.35
Total cost per serving = $1.90 + $0.85 + $0.03 + $0.03 + $0.90 + $0.50 + $0.35 = $4.56
In this example, the ingredients used to make the signature sandwich cost $4.56 per serving.
Understanding Food Cost Percentage and Profitability:
Food cost percentage plays a vital role in managing your restaurant's profitability. It measures the proportion of your revenue that goes toward covering food costs. By maintaining a low food cost percentage without compromising on food quality, you can allocate more gross profit to other expenses and generate higher revenue.
Here's what you need to know:
- What is Food Cost Percentage? Food cost percentage is the percentage of your total revenue that is spent on ingredients. It helps restaurants set menu prices effectively.
- Why is Food Cost Percentage Important? Calculating your food cost percentage allows you to make informed decisions about pricing, profitability, and cost optimization. It provides insights into dish profitability, menu performance, and overall restaurant operations.
- Determining the Ideal Food Cost Percentage: There is no universal ideal food cost percentage, as it varies based on factors such as the type of food served, overhead costs, and market conditions. However, most successful restaurants aim for a food cost percentage between 28% and 35% of revenue.
After calculating your food cost percentage, you can adjust menu prices to ensure profitability. Here's how to determine the ideal menu price based on your desired food cost percentage:
- Calculate the cost per serving of a menu item.
- Determine your ideal food cost percentage.
- Divide the cost per serving by the ideal food cost percentage to find the ideal menu item price.
Continuing with the sandwich shop let's assume their cost per serving is $4.56, and their ideal food cost percentage is 29%. We can calculate the ideal menu item price as follows:
Ideal menu item price = $4.46 / 0.29 Ideal menu item price = $15.37
Based on their desired food cost percentage of 29%, the ideal menu price for the signature burger should be $15.37.
Monitoring Menu Pricing's Effect on Sales
Once menu prices have been adjusted, it is crucial to monitor the impact on sales and profitability. Two scenarios may arise:
- Sandwich Sales Slow Down: If sales of the signature sandwich decrease after the price adjustment, it may indicate that the price is too high for customers. In this case, you can consider alternative solutions such as finding cheaper vendors, reducing portion sizes, adjusting ingredient portions, or using more cost-effective ingredients without compromising quality.
- Increased Sandwich Sales: Conversely, if the signature burger sells exceptionally well at the new price, it suggests that customers are willing to pay a higher price. You can explore raising the price further, aiming for a lower food cost percentage, such as 28% or lower.
By closely monitoring sales and analyzing the impact of price adjustments, you can optimize your menu for profitability.
5 Ways to Lower Food Costs:
Managing food costs is an ongoing effort for restaurants. To lower your food costs and improve profitability, consider the following strategies:
- Know Your Vendors: Explore alternative suppliers to find ingredients of comparable quality at lower prices. By comparing prices and negotiating with vendors, you can reduce your overall food costs.
- Optimize Ingredients: While using cheaper or less ingredients should be a last resort, evaluate your recipes to identify potential substitutes, portion changes, or alternative ingredients that maintain quality while reducing costs. However, be cautious not to compromise the taste and appeal of your dishes, as customer satisfaction is paramount.
- Adjust Portion Sizes: Evaluate portion sizes for menu items and consider reducing them slightly without compromising customer satisfaction. Smaller portions can lower food costs per serving, leading to improved profitability.
- Use meez: Leveraging technology, such as meez’s automated recipe costing tool with invoice processing capabilities, can greatly simplify the food costing process. Our tool gets you lase- accurate food costs, saves you time, and provides real-time insights into costs and profitability.
Accurate food cost calculation is crucial for managing a profitable restaurant. By understanding food costs, calculating food cost percentage, and setting menu prices strategically, you can optimize profitability and make informed decisions about your menu and operations.
Regularly monitor the impact of menu pricing on sales and consider strategies to lower food costs without sacrificing quality. Utilizing technology like meez can significantly streamline the food costing process and help you maintain a financially healthy restaurant. By implementing these strategies, you can ensure the long-term success of your business.